1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996 OR ______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________. Commission File No. 0-5132 RPM, INC. (Exact name of Registrant as specified in its charter) OHIO 34-6550857 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) P.O. Box 777; 2628 Pearl Road; Medina, Ohio 44258 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (330) 273-5090 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to the filing requirements for the past 90 days. Yes [ x ] No [ ] As of October 14, 1996, 77,497,491 RPM, Inc. Common Shares were outstanding. Exhibit Index on Page 11 of 12 pages.
2 RPM, INC. AND SUBSIDIARIES INDEX <TABLE> PART I. FINANCIAL INFORMATION Page No. <S> <C> Consolidated Balance Sheets August 31, 1996 and May 31, 1996 3 Consolidated Statements of Income Three Months Ended August 31, 1996 and 1995 4 Consolidated Statements of Cash Flows Three Months Ended August 31, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Results of Operations and Financial Condition 8 PART II. OTHER INFORMATION 10 </TABLE>
3 RPM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except per share amounts) <TABLE> <CAPTION> ASSETS ------ August 31, 1996 May 31, 1996 ---------------- ------------- Current Assets <S> <C> <C> Cash $ 25,786 $ 19,855 Marketable securities, at cost 13,074 14,422 Trade accounts receivable (less allowance for doubtful accounts $9,858 and $9,993) 241,315 231,560 Inventories 184,403 178,929 Prepaid expenses 29,862 20,360 ----------- ----------- Total current assets 494,440 465,126 ----------- ----------- Property, Plant and Equipment, At Cost 411,602 399,580 Less: accumulated depreciation and amortization 182,392 174,920 ----------- ----------- Property, plant and equipment, net 229,210 224,660 ----------- ----------- Other Assets Costs of businesses over net assets acquired 309,225 268,492 Intangible Assets 204,384 159,798 Equity in unconsolidated affiliates 17,082 16,623 Other 25,896 20,377 ----------- ----------- Total other assets 556,587 465,290 ----------- ----------- Total Assets $ 1,280,237 $ 1,155,076 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of long term debt $ 1,868 $ 1,747 Accounts payable 80,412 85,874 Accrued compensation and benefits 29,813 29,678 Accrued warranty and loss reserves 28,392 33,731 Other accrued liabilities 27,156 26,910 Income taxes payable 26,206 11,464 ----------- ----------- Total current liabilities 193,847 189,404 ----------- ----------- Long-term Liabilities Long-term debt, less current maturities 528,449 447,654 Deferred income taxes 76,912 14,375 Other long-term liabilities 19,550 57,810 ----------- ----------- Total long-term liabilities 624,911 519,839 ----------- ----------- Shareholders' Equity Common shares, stated value $.018 per share; authorized 100,000,000 shares; issued and outstanding 77,473,000 and 77,449,000 shares, respectively 1,410 1,410 Paid-in capital 215,203 215,019 Retained earnings 246,557 231,896 Cumulative translation adjustment (1,691) (2,492) ----------- ----------- Total shareholders' equity 461,479 445,833 ----------- ----------- Total Liabilities And Shareholders' Equity $ 1,280,237 $ 1,155,076 =========== =========== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. 3
4 RPM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended August 31, ----------------------------- 1996 1995 ---- ---- Restated * <S> <C> <C> Net Sales $329,231 $282,954 Cost of Sales 186,535 163,313 -------- -------- Gross Profit 142,696 119,641 Selling, General and Administrative Expenses 93,406 78,748 Interest Expense, Net 7,628 6,147 -------- -------- Income Before Income Taxes 41,662 34,746 Provision for Income Taxes 17,706 14,753 -------- -------- Net Income $ 23,956 $ 19,993 ======== ======== Earnings per common share and common share equivalent (Exhibit 11.1) $ 0.31 $ 0.27 ======== ======== Earnings per common share assuming full dilution (Exhibit 11.1) $ 0.29 $ 0.25 ======== ======== Dividends per common share $ 0.12 $ 0.11 ======== ======== </TABLE> *Data for August 31, 1995 has been restated to reflect a 25% stock dividend paid on December 8, 1995, and to reflect the January 12, 1996 acquisition of TCI, Inc. accounted for under the pooling-of-interests method. The accompanying notes to consolidated financial statements are an integral part of these statements. 4
5 RPM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended August 31, ----------------------------- 1996 1995 ----- ---- Restated * <S> <C> <C> Cash Flows From Operating Activities: Net Income $ 23,956 $ 19,993 Depreciation and amortization 12,086 9,735 Items not affecting cash and other (5,318) (3,073) Changes in operating working capital (11,150) (4,980) -------- -------- 19,574 21,675 -------- -------- Cash Flows From Investing Activities: Additions to property and equipment (6,259) (4,862) Acquisition of new businesses, net of cash (78,335) (19,590) -------- -------- (84,594) (24,452) -------- -------- Cash Flows From Financing Activities: Proceeds from stock option exercises 184 181 Increase (decrease) in debt 80,062 17,415 Dividends (9,295) (8,117) -------- -------- 70,951 9,479 -------- -------- Net Increase (Decrease) in Cash 5,931 6,702 Cash at Beginning of Period 19,855 19,834 -------- -------- Cash at End of Period $ 25,786 $ 26,536 ======== ======== </TABLE> Supplemental Schedule of Non-Cash Investing and Financing Activities: <TABLE> <S> <C> <C> Interest Accreted on LYONs $ 2,233 $ 2,120 </TABLE> *Data for August 31, 1995 has been restated to reflect a 25% stock dividend paid on December 8, 1995, and to reflect the January 12, 1996 acquisition of TCI, Inc. accounted for under the pooling-of-interests method. The accompanying notes to consolidated financial statements are an integral part of these statements. 5
6 RPM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1996 (Unaudited) (In thousands, except per share amounts) NOTE A - BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included for the three months ended August 31, 1996 and August 31, 1995. For further information, refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended May 31, 1996. NOTE B - INVENTORIES Inventories were composed of the following major classes: <TABLE> <CAPTION> August 31, May 31, 1996(1) 1996 --------- -------- <S> <C> <C> Raw material and supplies $ 66,983 $ 64,995 Finished goods 117,420 113,934 --------- -------- $ 184,403 $178,929 ========= ======== </TABLE> (1) Estimated, based on components at May 31, 1996. 6
7 RPM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1996 (Unaudited) (In thousands, except per share amounts) NOTE C - ACQUISITIONS On August 10, 1995, the Company acquired all of the outstanding shares of Star Finishing Products. On September 21, 1995, the Company acquired all of the outstanding shares of Dryvit Systems, Inc. On June 13, 1996, the Company acquired all the outstanding shares of Okura Holdings, Inc. for $73,000,000 in cash. Okura manufactures and markets fiberglass reinforced plastic grating products. These acquisitions as well as several small product line acquisitions have been accounted for by the purchase method of accounting. The following data summarizes, on an unaudited pro-forma basis, the combined results of operations of the companies for the three months ended August 31, 1996 and August 31, 1995. The pro-forma amounts give effect to appropriate adjustments resulting from the combination, but are not necessarily indicative of future results of operations or of what results would have been for the combined companies. <TABLE> <CAPTION> Three Months Ended ------------------------ August 31, August 31, 1996 1995 --------- -------- <S> <C> <C> Net Sales $ 330,456 $315,966 ========= ======== Net Income $ 23,902 $ 19,437 ========= ======== Earnings per common share and common share equivalent $ .31 $ .25 ========= ======== Earnings per common share assuming full dilution $ .29 $ .24 ========= ======== </TABLE> 7
8 RPM, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THREE MONTHS ENDED AUGUST 31, 1996 RESULTS OF OPERATIONS The Company acquired Okura Holdings, Inc., on June 13, 1996. With annual sales of approximately $35 million, Okura is a leading global manufacturer of molded and pultruded fiberglass reinforced plastic grating products, used for pedestrian walkways, platforms, staircases and similar types of industrial structures. Okura has posted a strong growth record under the leading brand names Fibergrate and Chemgrate. Okura offers the Company an attractive opportunity to capitalize on market, product and customer synergies. This acquisition is not expected to be dilutive in 1997. The Okura acquisition and that of Dryvit Systems, Inc. on September 21, 1995, along with several smaller acquisitions, net of several small divestitures, accounted for approximately two-thirds of the sales increase during the first quarter compared to the same period last year. Existing operations generated the balance of sales growth from a combination of higher unit volume and pricing adjustments that have averaged less than 2% year-to-year. Exchange rate differences had a slight negative effect on sales this year versus last. The gross profit margin strengthened to 43.3% from 42.3% a year ago. The majority of this improvement is the result of higher volume, certain raw material and packaging cost reductions, and labor and overhead expense controls. The balance of the margin improvement is the result of the recent acquisitions. Selling, general and administrative expenses increased to 28.4% of sales from 27.8% last year from non-recurring expense reductions a year ago and the timing of certain expenses this year, partly offset by the recent acquisitions. The interest expense increase reflects the additional indebtedness associated with this past year's acquisitions and the LYONs interest accretion. Debt reductions of approximately $30 million during the past year and slightly lower interest rates reduced interest expense comparatively. The company's net profit margin improved to 7.3% of sales from 7.1% a year ago as a result of the improved gross profit margin. The company's foreign sales and results of operations are subject to the impact of foreign currency fluctuations. Since most of the company's foreign operations are in Belgium, and the Belgian franc has been a fairly stable currency in relation to the majority of other currencies in which those operations transact business, this effect has been minimal. Foreign debt is denominated in the respective foreign currency, thereby eliminating any related translation impact on earnings. Earnings per share this year are affected by Company shares issued in connection with the Dryvit acquisition. Previously reported per share data has been restated to reflect the 25% 8
9 RPM, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THREE MONTHS ENDED AUGUST 31, 1996 stock dividend issued December 8, 1995. Data for August 1995 has further been restated to reflect the acquisition of TCI, Inc. on January 12, 1996, accounted for under the pooling-of-interests method. CAPITAL RESOURCES AND LIQUIDITY CASH PROVIDED FROM OPERATIONS The Company generated cash from operations of $20 million during its first fiscal quarter, slightly less than the same period a year ago, primarily as a result of timing differences of payables. Cash flow from operations continues to be the primary source of financing the Company's internal growth. INVESTING ACTIVITIES The Company is not capital intensive, but invests in capital expenditures primarily to improve production and distribution efficiency and capacity. Such expenditures generally do not exceed depreciation and amortization in a given year. The Company invested $80 million in the purchase of Okura and several smaller businesses this year, net of cash acquired. The Company historically has acquired complementary businesses and this trend is expected to continue. FINANCING ACTIVITIES On June 13, 1996, the Company completed the acquisition of Okura Holdings, Inc. for $73 million in cash, utilizing the Company's revolving credit facility for this transaction and the smaller acquisitions. Subsequently, on July 19, 1996, the Company renegotiated this facility to $250 million and extended its final maturity to 2001. This instrument had an outstanding balance of $160 million at August 31, 1996. As a result of the above transactions, the Company's debt-to-capital ratio stands at 53% compared to 50% at May 31, 1996, while interest coverage remains at over 5 times on a reported basis, over 7 times on a cash basis. Notably, on a fully diluted basis, the Company's debt ratio drops to 36%. Working capital increased to $301 million from $276 million at May 31, 1996, $10 million of this difference is attributable to the recent acquisitions, with the current ratio moving to 2.6:1 from 2.5:1, respectively. The Company maintains excellent relations with its banks and other financial institutions to further enable the financing of future growth opportunities. 9
10 Part II - Other Information ITEM 3 -- LEGAL PROCEEDINGS As previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996, Bondex International, Inc., a wholly-owned subsidiary of the Company ("Bondex"), was one of numerous corporate defendants in 430 then pending asbestos-related bodily injury lawsuits filed on behalf of various individuals in various jurisdictions of the United States. Subsequently, an additional 7 such cases have been filed and 5 such cases which had been filed were dismissed with prejudice without payment pursuant to summary judgment or stipulation of the parties, leaving a total of 432 such cases pending. Bondex continues to deny liability in all asbestos-related lawsuits and continues to vigorously defend them. Under a cost-sharing agreement among Bondex and its insurers effected in 1994, the insurers are responsible for payment of a substantial portion of defense costs and indemnity payments, if any, with Bondex responsible for a minor portion of each. As previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996, Dryvit Systems, Inc., a wholly-owned subsidiary of the Company ("Dryvit"), is a co-defendant in several separate but related lawsuits, some of which have sought to certify classes comprised of owners of structures clad with exterior insulation finish systems ("EIFS") products manufactured by Dryvit and other EIFS manufacturers. On September 18, 1996, the North Carolina court presiding over one of these cases, Ruff et al. v. Parex, Inc, et al. (96-CVS-0059), entered an order certifying a class of North Carolina owners of single family or multi-family residential dwellings which had an EIFS system installed during the period 1969 to present. On October 4, 1996, the Judicial Panel on Multi-District Litigation ordered that the nine pending federal court actions be transferred to the Eastern District Court of North Carolina for coordinated or consolidated pre-trial proceedings. The Defendants, including Dryvit, are presently evaluating their response to and options in light of these recent orders. Dryvit, through a joint defense arrangement, continues to contest the other class certification requests; challenge the merits of the plaintiffs' claims; and negotiate with and respond to the State of North Carolina Attorney General's Civil Investigative Demand dated May 31, 1996. 10
11 ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits <TABLE> <CAPTION> Official Exhibit Sequential Number Description Page Number ---------------- ----------- ----------- <S> <C> <C> 10.1 Amended and restated Credit Agreement, dated as of July 19, 1996, among RPM, Inc., the banks listed on the signature page thereof, and the Chase Manhattan Bank (National Association), as Administrative Agent, amending the Credit Facility by and among these parties, dated as of June 23, 1994, as further amended by Amendment No. 1 thereto, dated as of August 2, 1995. 11.1 Statement regarding computation of per share earnings. 27.1 Financial Data Schedule. </TABLE> (b) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended August 31, 1996. 11
12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RPM, Inc. By /s/ THOMAS C. SULLIVAN ---------------------- Thomas C. Sullivan Chairman & Chief Executive Officer By /s/ GLENN R. HASMAN ------------------- Glenn R. Hasman Principal Accounting Officer Date: October 15, 1996